Conducting the double materiality assessments and complying with the EU’s new sustainability reporting requirements (CSRD/ESRS) is a steep climb. We’ve noticed a common thread: Companies are looking for ways to turn sustainability reporting from a box-checking exercise into a strategic advantage. We advocate the use of materiality assessment for its original purpose; to inform business strategy to build long-term resilience. In this article, we’ll give you our take on why and how to do that.
Integrating DMA insights into business strategy and operations
For companies subject to the first wave of the ESRS, the first round of reporting is right around the corner. Most of these companies have completed their initial double materiality assessment (DMA) – i.e. they’ve ranked the significance of various sustainability issues. During the DMA process, strategy and business model links are often overlooked. However, the EU requires explicit disclosure of how a company’s commercial targets, business model, and material sustainability impacts, risks, and opportunities (IROs) are interlinked – signalling a shift in regulatory expectations.
Strategic Integration: ESRS link to business models
What does this mean in practice? According to the EU, companies must explain how their business model and commercial strategy interact with sustainability issues (ESRS 2, §46). This includes detailing where and how the company has societal impacts, financial risks and opportunities across the company’s value chain (ESRS 2 §38). Additionally, companies must show if, how, and when they plan to address these IROs I.e. will the company commit to strategic targets, will they adjust their business model, and are they allocating the necessary resources (ESRS 2, §75, §80 and §81).1
Integrate strategy and business model assessment in the DMA
Given the absence of universally accepted approaches to fulfilling these ESRS requirements, we’ve integrated strategy and business model considerations into our double materiality tool. Hereby, making the commercial link part of the materiality assessment of impacts and financial risks. The challenge is now capitalising on the strategic links and going beyond mere compliance to fully exploit the opportunities presented by the DMA.
From compliance to commercial value; it’s about using the insights from the DMA to reimagine your business
Despite detailed DMAs, many companies struggle to define what comes next. Common concerns include determining actionable steps for the most critical sustainability topics, identifying business model implications, and embedding the EU’s corporate sustainability principles within the organisational structures.
Translating the DMA results into strategic action by understanding how your business model drives negative impact and opportunities
At this end of the DMA process, we have laid the groundwork for managing and prioritising material IRO, however, no additional value has been derived from the DMA.
To start working strategically with your material IROs, it is relevant to ask yourself: “If nothing changed, what would each additional EUR earned mean for our material sustainability topics?” Exploring this question allows you to identify whether and in what ways your current business model might drive negative impacts. E.g. if your business grows will your carbon footprint do the same?
If you aim to grow your business without altering current practices, products or services, you may inevitably escalate negative impacts, i.e. your negative impacts and business model are intrinsically linked.
Drawing from these insights, the DMA provides a powerful foundation to reimagine your strategy and operational approaches. When managed effectively, material sustainability impacts can be transformed into drivers of commercial success, while enduring long-term resilience. We are excited for these steps to come, where more and more companies’ strategy work takes off in the DMA.
1These specific disclosure requirements are outlined in the standard as follows:
- Disclosing the elements of the strategy that relate to or impact sustainability matters, business model and value chain (ESRS 2 §38)
- Disclosing the interaction between the company’s material impacts and its strategy and business model (ESRS 2, §46)
- Disclose any metrics that are used to evaluate performance and effectiveness, in relation to a material impact, risk or opportunity (ESRS 2, §75).
- Disclose the measurable, outcome-oriented and time-bound targets on material sustainability matters set to assess progress (ESRS 2, §80).
- If the undertaking has not set any measurable outcome-oriented targets
- (a) it may disclose whether such targets will be set and the timeframe for setting them, or the reasons why the undertaking does not plan to set such targets (ESRS 2, §81a).
- (b) it shall disclose whether it nevertheless tracks the effectiveness of its policies and actions in relation to the material sustainability-related impact, risk and opportunity (ESRS 2, §81b).
